One of the most difficult tasks you will face as a small business owner is to obtain money, a loan or investor funds, to operate your business. When you start your business, you may be able to use your personal savings; you may also be able to tap friends and family for some funds. However, at some point, you will have to go outside your immediate circle and into the market place and obtain a small business loan. Since banks consider small business loans risky, you have to be prepared before you approach your loan officer. Here are five issues the bank will consider.
Your Personal Credit History
One of the most important things you must remember as a small business owner is that your personal credit history plays an enormous role in your ability to attract financing for your business. Banks and other financial institutions will look closely at your credit history and credit score before lending you money.
You should obtain your credit reports from the three main credit reporting agencies, TransUnion, Experian, and Equifax, before applying for a loan and make sure there are no errors on them. If there are any errors, write the credit reporting agency a letter disputing the error so a correction can be made. Make sure that you are able to explain any late payments or defaults on your credit report before you go to the bank. So, the first thing you should do before approaching a bank is to have your credit history in order.
How Much Money Do You Need?
Second, you must estimate how much you will need in assets to start up your business, such as inventory, money for payroll, supplies, manufacturing expenses, real estate, and miscellaneous assets.
How Good is Your Business Plan?
Third, you will need to have a business plan. The business plan must tell the bank what the business is and why it is feasible in your area. You must make your case both in words and in numbers. Most banks require at least five years of forecasted financial statements before they will make a loan. In other words, you must look five years out into the future and try to estimate your sales and expenses for those five years. This is not an easy task, but you can base your estimates on similar businesses in your area and economic variables such as inflation rates. Developing a business plan will require some research on your part, and you may want to hire a financial planner or an accountant to help you.
The Profitability of Your Business
Fourth, you must convince your loan officer that your business will be profitable. You use your forecasted financial statements for this task. The loan officer must be persuaded the business will be profitable in order to be confident that you will pay back the small business loan in a timely manner.
What if Your Loan is not Granted?
One of the last questions the loan officer is likely to ask you is what you will do if your loan is not granted. Have a good answer prepared for this question. You want to remain excited and positive about your business; you want to explain to the bank that you will simply try other lenders and programs that cater to small businesses until you find someone to finance you.
Remember that you may have to try several lenders before you are successful in obtaining a small business loan. Don’t get discouraged!
